Many organizations find that working with independent contractors allows them access to specialized services while improving their operational costs. However, it is essential to keep in mind some liability considerations that must be addressed when choosing this route, as professional liability coverage does not always extend to independent contractors.
The Coverage Gap for Independent Contractors
Professional liability insurance, or errors and omissions (E&O) insurance, protects businesses and professionals from negligence, mistakes, or inadequate work claims. There is no doubt that these policies offer essential protection for companies and their employees. However, many businesses are surprised to learn that they typically exclude independent contractors from their coverage.
This exclusion can be attributed to the fundamental principles of insurance. Insurance carriers design their standard liability policies to accommodate traditional employer-employee relationships in which the company has direct control over its workforce’s work processes, quality standards, and training protocols. Independent contractors, by definition, work outside of this control structure, which raises the risks significantly from the insurer’s standpoint.
Factors Behind the Exclusion
Here is a closer look at some of the factors behind the standard exclusion of independent contractors from professional liability policies:
Legal classification distinctions are the main concern as independent contractors are legally separate entities from the companies that work with them. From the insurer’s point of view, a contractor poses a very specific risk profile that should be covered under their own policy instead of the company that hires them.
Risk assessment challenges also play a role. Insurance carriers do not have much opportunity to evaluate the qualifications, work quality, and other risk factors associated with contractors when they are not permanent employees. This means that carriers cannot correctly estimate the additional risk exposure contractors pose.
The dynamic nature of contractor relationships only adds to the complication. Since contractors are often only hired to work on specific projects or for limited timeframes, insurance carriers often have trouble maintaining an accurate risk assessment as the list of workers changes frequently.
What Does This Coverage Gap Mean For Businesses?
The fact that independent contractors are typically excluded from professional liability policies creates several notable risks for businesses.
Financial exposure is the primary concern; when a contractor makes a mistake that leads to client damages, the company that hired them could face claims despite the contractor’s independent status. Without proper coverage, the business will be forced to pay these claims out-of-pocket or pay the bill for costly litigation.
In addition, contract disputes frequently arise when coverage responsibilities aren’t clearly communicated. This means that clients could hold the primary company responsible regardless of who actually performed the work, leading to very complex liability situations.
Businesses must keep in mind that reputational damage extends beyond the immediate financial impacts. Claims resulting from a contractor error will reflect poorly on the company that hired them and could damage their client relationships and future business opportunities.
Addressing the Gap
What can organizations do to address this problematic gap in coverage?
Thorough contract language is typically the first line of defense. Contracts with independent contractors should explicitly state their insurance requirements, including professional liability coverage with adequate limits. They should also include indemnification clauses that protect the hiring company from liabilities arising from the contractor’s errors.
Following careful verification protocols can help establish compliance with insurance requirements. Before working with a contractor, the organization should collect and verify their certificates of insurance to confirm they have appropriate insurance coverage types and limits.
For projects with particularly high-risk profiles, project-specific policies should be obtained for targeted protection. These specialized insurance policies can provide extended coverage to include specific contractors for the duration of a project.
Another way organizations can address the risk is by sponsoring professional liability coverage through their existing insurance carrier. This can give them more control over the process and greater peace of mind that adequate coverage is in place.
Work with Professionals
This is a highly complex area, and working with professionals can help avoid coverage gaps and unexpected exposures. Many businesses in this situation turn to professional benefits consultants, whose experience with these situations and carrier relationships enables them to provide an effective risk management strategy that respects their budget.
Partner With Business Benefits Group
Working with independent contractors can give you a significant edge over your competitors, but it is important to understand your liability exposures and take appropriate action to reduce them.
At Business Benefits Group (BBG), our team of experienced benefits consultants specializes in addressing the exclusive risk management challenges facing today’s businesses. Nearly three decades of industry leadership back our thorough, strategic solutions personalized to your specific operational needs.
Reach out today for a review of your current liability coverage and contractor relationships, and get started on developing a customized strategy that protects your business while supporting your goals.